Exercise 7-10 Production and Direct Materials Budgets [LO7-3, LO7-4] Pearl Produ

Question

Exercise 7-10 Production and Direct Materials Budgets [LO7-3, LO7-4] Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company is now planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements: a. The finished goods inventory on hand at the end of each month must be equal to 2,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 11,250 units. b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 57,375 cc of solvent H300. c. The company maintains no work in process inventories. A sales budget for Supermix for the last six months of the year follows. Budgeted Sales in Units July 37,000 August 42,000 September 52,000 October 32,000 November 22,000 December 12,000 Required: 1. Prepare a production budget for Supermix for the months July, August, September, and October. 3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Explanation / Answer

SOLUTION

1. Production Budget

3. Direct Materials Budget

*29,500 units (October production) * 3 cc per unit = 88,500 cc

88,500 cc * 1/2 = 44,250 cc

July August September October Budgeted sales (units) 37,000 42,000 52,000 32,000 Add: Desired ending inventory [2,000 + (25%*next month's sales)] 12,500 15,000 10,000 7,500 Total needs 49,500 57,000 62,000 39,500 Less: Beginning Inventory (11,250) (12,500) (15,000) (10,000) Required production 38,250 44,500 47,000 29,500

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